Economic Organizations, Institutions and Markets

PROBLEM SET 5

1. Okupas

In recent times, different groups of people have “occupied” empty apartments, second
residences and vacant buildings. Initially, occupiers were Anti-System and countercultural
movements. Especially after the economic crisis starting in 2008, it also became common
for some homeless activist organizations to be involved in occupations. Later on, organized
mafias, which rent the apartments for money, seem to be also playing a significant role.
Spanish owners have difficulties to repossess their houses because, once they have been
occupied, occupiers cannot be evicted legally but after a slow judicial process, as
residences enjoy special protection and social service must provide alternative housing. A
variety of businesses have also appeared to prevent occupation (e.g., the business models
of firms such as STM, with its “anti-okupa” doors [visit http://stmseguridad.com/]) and to
speed up repossession (e.g., “Desokupa” [visit https://www.desokupa.com/]).

(1) Analyze the case from the perspective of Coase (1960) in terms of property rights and
transaction costs.

In this case there is an externality whereby all costs related to externality are transferred to
the owner of the home. That is, the opportunity cost of housing (for example, if you had in
mind renting the house), the costs of electricity, water, etc. Therefore, the occupation,
which is born as a housing need for people with few resources, becomes an externality
that discourages the demand for housing. Is like the example from Coase’s reading about a
railway, in which when the railways has to pay the farmers for the externalities, they prefer
not to do any travel.

If we analyze the case from

the perspective of Coase, we
can say that the cost of an


empty apartment being
occupied is less than the
benefit of a homeless
person      

having a roof to live in,
therefore the Government
should not intervene. And
when it      

comes to property rights and
transactions, companies who
help the owners   

recuperate their house are
looking for an efficient way
to measure this negotiation


and to ensure properties.
If we analyze the case from
the perspective of Coase, we
can say that the cost of an


empty apartment being
occupied is less than the
benefit of a homeless
person      

having a roof to live in,
therefore the Government
should not intervene. And
when it      

comes to property rights and
transactions, companies who
help the owners   

recuperate their house are
looking for an efficient way
to measure this negotiation


and to ensure properties.
If we analyze the case from
the perspective of Coase, we
can say that the cost of an


empty apartment being
occupied is less than the
benefit of a homeless
person      

having a roof to live in,
therefore the Government
should not intervene. And
when it      

comes to property rights and
transactions, companies who
help the owners   

recuperate their house are
looking for an efficient way
to measure this negotiation


and to ensure properties.
If we analyze the case from the perspective of Coase, we can say that the cost of an empty
apartment being occupied is less than the benefit of a homeless person having a roof to
live in, therefore the Government should not intervene. And when it comes to property
rights and transactions, companies who help the owners recuperate their house are
looking for an efficient way to measure this negotiation and to ensure properties.

(2) Modern societies aim to provide proper housing to all. Do tolerance with occupations
serve this goal well as compared to other possible options?

It’s true that occupations could solve part of the problem in the short term, but affecting
the housing market since the cost of this need is shifting to homeowners. A more optimal
option would be an increase in public housing, better employment possibilities.... Basically
offer more possibilities to this people with few resources.

(3) Using the analytical tools in the readings, analyze the proposed new Catalan rules on
“okupas” described by Benedito (2020).

The new Catalan law specifies

that if someone has more than
15 empty households, has the
obligation to give social rent to
that person who occupies their
home for at least 14 years
The new Catalan law specifies
that if someone has more than
15 empty households, has the
obligation to give social rent to
that person who occupies their
home for at least 14 years
They say that any person that owns 15 households has the obligation to give rent to an
okupa for up to 14 years.

2. Mortgage liability

The economic crisis experienced by Spain and some other countries suffering a real estate
“bubble” came along with an acute mortgage crisis. Many borrowers faced difficulties in
paying their debts, especially those who had bought when prices were higher, for whom
the quantity left to pay may even be greater than the market value of their home. There is
growing concern voiced in both academic and policy debates about the potentially
deleterious effects of creditors evicting debtors to sell the house and collect the debt. The
default rule is that, if the selling price is not sufficient to cover the remaining debt, the
debtor must continue paying until returning the total amount owed. The issue is complex
and the analysis encompasses the application of most of the topics covered in the course.
Here are some questions related with each of the topics, following the same order of the
syllabus:

1. Based on the first topic of the course, which are the difficulties faced by individuals
when making decisions related to borrowing? In the event of default, a real guarantee,
such as a mortgage, allows the creditor to collect the debt through the sale of the
mortgaged property. Can granting a real guarantee on the debtor´s assets alleviate
some of the difficulties? On which type of assets?

By default, humans tend to be risk averse, so a real guarantee can make creditors much
more likely to grant that credit. This is especially efficient for assets whose prices are
usually kept stable.

2. Often, banks offer mortgage loans with favorable conditions during the first year of
mortgage payments (e.g., lower interest rate, lower payments). (a) Does this practice
provide utility to the debtor? (b) Could this practice be used by the creditor to take
advantage of the cognitive difficulties of the debtor? (c) What consequences, if any,
would this practice generate in a competitive market?
Since we tend to give more importance to the short-term conditions than to the long-term
ones, yes, this practice make the debtor utility increase. In these cases, the probability of
debtor accepting the contract is higher.

3. Do the above-mentioned evictions from mortgage default generate externalities? Of

which kind, positive or negative? Why?

Yes, for example, as mentioned in the exercise 1, these evictions could stimulate
occupations, which is clearly a negative externalitie.

4. When contracting, is the debtor interested in offering the creditor effective guarantees,
even draconian, that the loan will be repaid? Analyze the advisability of regulating
mortgage contracts, and in particular, the mortgage liability clause (the clause for
which the debtor is or not exempted from liability via the repossession of the asset
that serves as collateral, i.e., nonrecourse debt —known in Spain as “dación en pago”)
through mandatory rules (the rules in a contract that judges will enforce under any
circumstances) and default rules (the rules in a contract that the parties involved can
amend if they agree). Examine whether or not there is a difference in the possibility
that changes in the mortgage liability clause were applied retroactively or
prospectively. What would be the effect of having judges ruling against home evictions
on the credit market and especially on future loans?

Yes, because if the risk is lower, there are more probabilities of receiving the house with a
better contract conditions.

Nonrecourse debt it is a way to pay off the debt without having to foreclose, simply by
transferring the property to the creditor. The main advantage here is that such processes
are much less costly than debt executions.

Judicial decisions against home evictions may influence how lenders assess risk and may
result in adjustments to lending practices. If lenders perceive a higher risk due to potential
limitations on repossession, they might become more selective or adjust interest rates to
compensate for increased risk.

5. The Spanish savings banks (“cajas”) are a kind of financial institution that, even if legally
were and are private entities, were almost all controlled by representatives of the regions
and, to a lesser extent, municipalities and unions. This orientation to the community has
been emphasized through the pledged commitment to developing a social responsibility
policy called “social work” (obra social), which visibly resulted in grants for cultural
activities and, less visibly but more importantly, in its availability to invest and lend to
companies promoted by the political entities that controlled them. Investigate how they
behaved, as compared to private banks, during the real estate bubble and the economic
crisis that began in 2007, trying to identify whereas they treated their clients better or
worse with respect to issues such as selling so-called 2 “preferred bonds” (obligaciones
preferentes), the contractual conditions of their mortgages, and the voluntary
renegotiation of the contractual conditions of mortgages that were on risk of default.

During the real estate bubble banks treated their clients better to increase their potential
consumers. They did it by granting a higher amount of mortgages.
When it comes to preferred bonds, these banks would sell a lot without giving full
information about them to their clients so they would buy them more.